We are the hollow men
We are the stuffed men
Leaning together
Headpiece filled with straw. Alas!
Our dried voices, when
We whisper together
Are quiet and meaningless
As wind in dry grass
Or rats’ feet over broken glass
In our dry cellar…

This is the way the world ends
This is the way the world ends
This is the way the world ends
Not with a bang but a whimper.

“What we may be witnessing is not just the end of the Cold War, or the passing of a particular period of postwar history, but the end of history as such: that is, the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government. This is not to say that there will no longer be events to fill the pages of Foreign Affair’s yearly summaries of international relations, for the victory of liberalism has occurred primarily in the realm of ideas or consciousness and is as yet incomplete in the real or material world. But there are powerful reasons for believing that it is the ideal that will govern the material world in the long run.

– Francis Fukuyama, The End of History and the Last Man

Francis Fukuyama created all sorts of controversy when he declared “the end of history” in 1989 (and again in 1992 in the book cited above). That book won general applause, and unlike many other academics he has gone on to produce similarly thoughtful work. A review of his latest book, Political Order and Political Decay: From the Industrial Revolution to the Globalisation of Democracy, appeared just yesterday in The Economist. It’s the second volume in a two-volume tour de force on “political order.”

I was struck by the closing paragraphs of the review:

Mr. Fukuyama argues that the political institutions that allowed the United States to become a successful modern democracy are beginning to decay. The division of powers has always created a potential for gridlock. But two big changes have turned potential into reality: political parties are polarised along ideological lines and powerful interest groups exercise a veto over policies they dislike. America has degenerated into a “vetocracy”. It is almost incapable of addressing many of its serious problems, from illegal immigration to stagnating living standards; it may even be degenerating into what Mr. Fukuyama calls a “neopatrimonial” society in which dynasties control blocks of votes and political insiders trade power for favours.

Mr. Fukuyama’s central message in this long book is as depressing as the central message in “The End of History” was inspiring. Slowly at first but then with gathering momentum political decay can take away the great advantages that political order has delivered: a stable, prosperous and harmonious society.

While I am somewhat more hopeful than Professor Fukuyama is about the future of our political process (I see the rise of a refreshing new kind of libertarianism, especially among our youth, in both conservative and liberal circles, as a potential game changer), I am concerned about what I think will be the increasing impotence of monetary policy in a world where the political class has not wisely used the time that monetary policy has bought them to correct the problems of debt and market-restricting policies. They have avoided making the difficult political decisions that would set the stage for the next few decades of powerful growth.

So while the title of this letter, “The End of Monetary Policy,” is purposely provocative, the longer and more appropriate title would be “The End of Effective and Productive Monetary Policy.” My concern is not that we will move into an era of no monetary policy, but that monetary policy will become increasingly ineffective, so that we will have to solve our social and physical problems in a much less friendly economic environment.

In today’s Thoughts from the Frontline, let’s explore the limits of monetary policy and think about the evolution and then the endgame of economic history. Not the end of monetary policy per se, but its emasculation.

The End of Monetary Policy

Asset classes all over the developed world have responded positively to lower interest rates and successive rounds of quantitative easing from the major central banks. To the current generation it all seems so easy. All we have to do is ensure permanently low rates and a continual supply of new money, and everything works like a charm. Stock and real estate prices go up; new private equity and credit deals abound; and corporations get loans at low rates with ridiculously easy terms. Subprime borrowers have access to credit for a cornucopia of products.

What was Paul Volcker really thinking by raising interest rates and punishing the economy with two successive recessions? Why didn’t he just print money and drop rates even further? Oh wait, he was dealing with the highest inflation our country had seen in the last century, and the problem is that his predecessor had been printing money, keeping rates too low, and allowing inflation to run out of control. Kind of like what we have now, except we’re missing the inflation.

Let’s Look at the Numbers

The Organization for Economic Cooperation and Development has a marvelous website full of all sorts of useful information. Let’s start by looking at inflation around the world. This table is rather dense and is offered only to give you a taste of what’s available.

What we find out is that inflation is strikingly, almost shockingly, low. It certainly seems so to those of us who came of age in the ’60s and ’70s and who now, in the fullness of time, are watching aghast as stupendous amounts of various currencies are fabricated out of thin air. Seriously, if I had suggested to you back in 2007 that central bank balance sheets would expand by $7-8 trillion in the next half-decade but that inflation would be averaging less than 2%, you would have laughed in my face.

Let’s take a quick world tour. France has inflation of 0.5%; Italy’s is -0.2% (as in deflation); the euro area on the whole has 0.4% inflation; the United Kingdom (which still includes Scotland) is at an amazingly low 1.5% for the latest month, down from 4.5% in 2011; China with its huge debt bubble has 2.2% inflation; Mexico, which has been synonymous with high inflation for decades, is only running in the 4% range. And so on. Looking at the list of the major economies of the world, including the BRICS and other large emerging markets, there is not one country with double-digit inflation (with the exception of Argentina, and Argentina is always an exception – their data lies, too, because inflation is 3-4 times what they publish.) Even India, at least since Rajan assumed control of the Reserve Bank of India, has watched its inflation rate steadily drop.

Japan is the anomaly. The imposition of Abenomics has seemingly engineered an inflation rate of 3.4%, finally overcoming deflation. Or has it? What you find is that inflation magically appeared in March of this year when a 3% hike in the consumption tax was introduced. When government decrees that prices will go up 3%, then voilà, like magic, you get 3% inflation. Take out the 3% tax, and inflation is running about 1% in the midst of one of the most massive monetary expansions ever seen. And there is reason to suspect that a considerable part of that 1% is actually due to the ongoing currency devaluation. The yen closed just shy of 110 yesterday, up from less than 80 two years ago.

I should also point out that, one year from now, this 3% inflation may disappear into yesteryear’s statistics. The new tax will already be factored into all current and future prices, and inflation will go back to its normal low levels in Japan.

Inflation in the US is running less than 2% (latest month is 1.7%) as the Fed pulls the plug on QE. As I’ve been writing for … my gods, has it really been two decades?! – the overall trend is deflationary for a host of reasons. That trend will change someday, but it will be with us for a while.

The G-20 itself is growing at an almost respectable 3%, but when you look at the developed world’s portion of that statistic, the picture gets much worse. The European Union grew at 0.1% last year and is barely on target to beat that this year. The euro area is flat to down. The United Kingdom and the United States are at 1.7% and 2.2% respectively. Japan is in recession. France is literally at 0% for the year and is likely to enter recession by the end of the year. Italy remains mired in recession. Powerhouse Germany was in recession during the second quarter.

Let’s put those stats in context. We have seen the most massive monetary stimulation of the last 200 years in the developed world, and growth can be best described as faltering. Without the totally serendipitous shale oil revolution in the United States, growth here would be about 1%, or not much ahead of where Europe is today.

Demographics, Debt, Bond Bubbles, and Currency Wars

Look at the rest of the economic ecology. Demographics are decidedly deflationary. Every country in the developed world is getting older, and with each year there are fewer people in the working cohort to support those in retirement. Government debt is massive and rising in almost every country. In Japan and many countries of Europe it is approaching true bubble status. Anybody who thinks the current corporate junk bond market is sustainable is smoking funny-smelling cigarettes. (The song from my youth “Don’t Bogart That Joint” pops to mind. But I digrass.)

We are seeing the beginnings of an outright global currency war that I expect to ensue in earnest in 2015. My co-author Jonathan Tepper and I outlined in both Endgame and Code Red what we still believe to be the future. The Japanese are clearly in the process of weakening their currency. This is just the beginning. The yen is going to be weakening 10 to 15% a year for a very long time. I truly expect to see the yen at 200 to the dollar somewhere near the end of the decade.

ECB head Mario Draghi is committed to weakening the euro. The reigning economic philosophy has it that weakening your currency will boost exports and thus growth. And Europe desperately needs growth. Absent QE4 from the Fed, the euro is going to continue to weaken against the dollar. Emerging-market countries will be alarmed at the increasing strength of the dollar and other developed world currencies against their currencies and will try to fight back by weakening their own money. This is what Greg Weldon described back in 2001 as the Competitive Devaluation Raceway, which back then described the competition among emerging markets to maintain the devaluation of their currencies against the dollar.

Today, with Europe and Japan gunning their engines, which have considerable horsepower left, it is a very competitive race indeed – and one with far-reaching political implications for each country. As I have written in past letters, it is now every central banker for him- or herself.

That Pesky Budget Thing

Developed governments around the world are running deficits. France will be close to a 4% deficit this year, with no improvement in sight. Germany is running a small deficit. Japan has a mind-boggling 8% deficit, which they keep talking about dealing with, but nothing ever actually happens. How is this possible with a debt of 250% of GDP? Any European country with such a debt structure would be in a state of collapse. The US is at 5.8% and the United Kingdom at 5.3%, while Spain is still at 5.5%.

Let’s focus on the US. Everyone knows that the US has an entitlement-driven spending problem, but very few people I talk with understand the true nature of the situation, which is actually quite dire, looming up ahead of us. In less than 10 years, at current debt projection growth rates, the third-largest expenditure of the United States government will be interest expense. The other three largest categories are all entitlement programs. Discretionary spending, whether for defense or anything else, is becoming an ever-smaller part of the budget. Social Security, Medicare, and Medicaid now command nearly two-thirds of the national budget and rising. Ironically, polls suggest that 80% of Americans are concerned about the rising deficit and debt, but 69% oppose Medicare cutbacks, and 78% oppose Medicaid cutbacks.

At some point in the middle of the next decade, entitlement spending plus interest payments will be more than the total revenue of the government. The deficit that we are currently experiencing will explode. The following chart is what will happen if nothing changes. But this chart also cannot happen, because the bond market and the economy will simply implode before it does.

A Multitude of Sins

Monetary policy has been able to mask a multitude of our government’s fiscal sins. My worry for the economy is what will happen when Band-Aid monetary policy can no longer forestall the hemorrhaging of the US economy. Long before we get to 2024 we will have a crisis. In past years, I have expected the problems to come to a head sooner rather than later, but I have come to realize that the US economy can absorb a great deal of punishment. But it cannot absorb the outcomes depicted in those last two charts. Something will have to give.

And these projections assume there will be no recession within the next 10 years. How likely is that? What happens when the US has to deal with its imbalances at the same time Europe and Japan must deal with theirs? These problems are not resolvable by monetary policy.

Right now the markets move on every utterance from Janet Yellen, Mario Draghi, and their central bank friends. Central banking dominates the economic narrative. But what happens to the power of central banks to move markets when the fiscal imperative overcomes the central bank narrative?

Sometime this decade (which at my age seems to be passing mind-numbingly quickly) we are going to face a situation where monetary policy no longer works. Optimistically speaking, interest rates may be in the 2% range by the end of 2016, assuming the Fed starts to raise rates the middle of next year and raises by 25 basis points per meeting. If we were to enter a recession with rates already low, what would dropping rates to the zero bound again really do? What kind of confidence would that tactic actually inspire? And gods forbid we find ourselves in a recession or a period of slow growth prior to that time. Will the Fed under Janet Yellen raise interest rates if growth sputters at less than 2%?

An even scarier scenario is what will happen if we don’t deal with our fiscal issues. You can’t solve a yawning deficit with monetary policy.

Further, at some point the velocity of money is going to reverse, and monetary policy will have to be far more restrained. The only reason, and I mean only, that we’ve been able to get away with such a massively easy monetary policy is that the velocity of money has been dropping consistently for the last 10 years. The velocity of money is at its lowest level since the end of World War II, but it is altogether possible that it will slow further to Great Depression levels.

When the velocity of money begins to once again rise – and in the fullness of time it always does – we are going to face the nemesis of inflation. Monetary policy during periods of inflation is far more constrained. Quantitative easing will not be the order of the day.

For Keynesians, we are in the Golden Age of Monetary Policy. It can’t get any better than this: free money and low rates and no consequences (at least no consequences that can be seen by the public). This will end, as it always does…

Not with a Bang but a Whimper

Will we see the end of monetary policy? No, policy will just be constrained. The current era of easy monetary policy will not end (in the words of T.S. Eliot) with a bang but a whimper. Janet or Mario will walk to the podium and say the same words they do today, and the markets will not respond. Central banks will lose control of the narrative, and we will have to figure out what to do in a world where profits and productivity are once again more important than quantitative easing and monetary policy.

You need to be thinking about how you will react and how you want to protect your portfolios in such a circumstance. Even if that volatility is years off, “war-gaming” how you will respond is an important exercise. Because it will happen, unless Congress and the White House decide to resolve the fiscal crisis before it happens. Calculate the odds on that happening and then decide whether you need to have a plan.

Unless you think the bond market will continue to finance the US government through endless deficits (as so far has happened in Japan), then you need to start to contemplate the end of effective monetary policy. I would note that, even in Japan, monetary policy has not been effective in restarting an economy. It is a quirk of Japan’s social structure that the Japanese have devoted almost their entire net savings to government bonds. As the savings rate there is getting ready to turn negative, we are going to see a very different economic result. Japan with the yen at 200 and an even older society will look a great deal different than the country does today.

Current market levels of volatility and complacency should be seen as temporary. Plan accordingly.

Washington DC, Chicago, Athens (Texas), and Boston

I am in Washington DC as you read this. I have a few meetings set up, as well as a speaking engagement, and then I’ll return home to meet with my business partners at Mauldin Economics later in the week. In the middle of October I will go to Chicago for a speech, fly back to a meeting with Kyle Bass and his friends at the Barefoot Ranch in Athens, Texas, and then fly out to Boston to spend the weekend with Niall Ferguson and some of his friends. I am sure I will be happily surfing mental stimulus overload that week.

Next weekend (October 4) is my 65th birthday. I had originally thought I would do a rather low-key event with family; but my staff, family, and friends have different plans. I’m not really supposed to know what’s going on and don’t really have much of an idea as I am not allowed around planning sessions, but it sounds like fun.

I am walking on legs that feel like Jell-O, as it was “legs day” yesterday, working out with The Beast. My regular workout partner couldn’t make it, so he was able to focus on exhausting me to the maximum extent possible. I’ve never been all that athletic. As a kid, for the most part I was not allowed to participate in PE due to some physical limitations (which fortunately went away as I grew older).

I became a true geek. Not that that is all bad: it has served me rather well later in life. Geeks rule. It wasn’t until I was in my mid-40s that I began to go to the gym on more than a haphazard basis. And I must confess that I was a typical male in that I focused on my upper body as opposed to my legs and abdominals. That oversight is catching up with me now. The Beast is forcing me to devote more time to my legs and core. Much better for me as I approach the latter half of my 60s, but it’s painful to realize the cost of my negligence.

In the last five or six years my travel has reduced my gym time, or at least that’s my excuse. For whatever reason, my travel has been reduced for the last two months, so I’m getting much more time in the gym, and my workouts are more well-rounded. I typically try to do at least another 30 minutes of cardio after our training sessions, even if the session was based around cardio. Except on leg days. There’s nothing left for extra walking or cycling after leg days.

I share this because I want you to understand that working out is just as important as your investment strategy. I fully intend to be going strong for a very long time. But that doesn’t happen (at least as easily) if you lose your legs. As much as I hate leg days, I probably need those workouts more than any others.

It’s time to hit the send button. I hear kids and grandkids gathering in the next room. That’s something else that is just as important as investment strategy. You have a great week.

America’s bombing raids on the so-called Islamic State in Syria have greatly increased its military role in the region. But they offer no quick route to victory

Sep 27th 2014CAIRO, ISTANBUL AND WASHINGTON, DC

IT WAS intense. The barrage of Tomahawk missiles and precision-guided bombs launched against the jihadists who call themselves Islamic State (IS) in the early hours of September 23rd surpassed in just a few hours six weeks’ worth of American air attacks against the bits of IS on the Iraqi side of the now-effaced frontier. The attacks stood out in other ways, too. They were the fruit of an unusual military coalition, with five Arab countries not only prepared to join and assist the raids, but also to be identified as doing so. And they made America a fully fledged participant in Syria’s civil war, an entanglement Barack Obama has fought a three-year campaign to avoid. But this now exceptional undertaking may well be the beginning of a new normal. The defeat of IS will need a protracted effort.When Barack Obama promised on September 10th that he would “degrade and ultimately destroy” IS few expected an attack on quite this level of “shock and awe” to be deployed so soon. Surely getting the right regional allies in line would take time, as would the choice of targets. But less than two weeks later Saudi Arabia, Jordan, Bahrain and the United Arab Emirates were joining in the attack, mostly flying American-supplied F-16s; Qatar provided logistical support.That said, most of the firepower was American, with cruise missiles and waves of carrier-borne and land-based jets (including, for the first time in combat, the stealthy F-22 Raptor) backed up by armed drones. More than a dozen strikes were carried out against a variety of IS targets, many in and around Raqqa, a city which the jihadists took control of last year. They were identified as a headquarters building, a finance centre, training compounds, storage facilities, supply trucks and armoured vehicles. A separate series of eight missile strikes, carried out by American forces alone, targeted a hitherto obscure jihadist cell which American officials call the “Khorasan group” at several sites near Aleppo.

United, for now

On September 24th five further strikes were reported on the Syrian-Iraqi border. Rami Abdul Rahman, who runs the Syrian Observatory for Human Rights, said there had also been raids west of the town of Kobane, also known as Ain al-Arab, near Turkey. One objective may have been to provide relief for Syrian Kurds struggling to hold out against an IS onslaught; if IS were to take Kobane despite being under air attack it would be a striking victory.In Washington, Republican and Democratic leaders in Congress offered bipartisan support, broadly reflecting the changed mood of their constituents. Only last year, a war-weary American public hated the idea of getting involved in Syria. It disapproved even of limited cruise-missile strikes to punish Syria’s president Bashar Assad for using chemical weapons against civilians. Now IS is perceived as a direct threat to the safety of Americans, testimony to the power of atrocities promulgated via internet video—in this case the beheadings of two American journalists and a British aid worker.But if America’s mood of unity is broad, it is also shallow. There is no consensus about whether its military might is being deployed to bring greater stability to the Middle East or whether the mission is much narrower: a counter-terrorist operation to neutralise threats at a distance, and thus protect Americans at home. Mr Obama has done little to clear that confusion up. He has said that IS is mainly a threat to the people of the Middle East, repeatedly declaring that “this is not America’s fight alone”. But he and his officials also make their mission sound like a counter-terrorist operation to protect people at home, using the phrase “a network of death” to describe IS. The strike on the Khorasan group fits into a debate dominated by talk of domestic security.

Surprisingly, perhaps, the Syrian government has not protested much. Its main beef is that America refuses to treat it as an ally against IS. “We are facing one enemy. We should co-operate,” says a government spokesman, Bassam Abu Abdullah. Some reports claim that key intelligence on the Khorasan group was supplied by Syria. Other sources in the region claim that the raids against IS near Kobane were carried out not by America but by Syria itself.America insists that “there was no co-ordination and no military-to-military communication” with Syria; it only informed Syrian diplomats at the United Nations of upcoming raids, and Syrian radars were “passive”.Syria’s apparent acquiescence makes the task of justifying strikes on its territory a bit easier. America argues that the raids were conducted on the basis of Article 51 of the UN Charter, which asserts the right to collective self-defence; in such cases neither a Security Council resolution nor the permission of the relevant government is required. America’s ambassador to the UN, Samantha Power, argued to its secretary-general, Ban Ki-moon, that Iraq had asked America to assist in defending itself from IS; that the group was using havens in Syria to mount attacks on Iraq; and that the government of Syria was either unable or unwilling to prevent this. It therefore followed that the strikes were legal.The use of the “unable or unwilling” argument to trump national sovereignty, which is regarded as controversial by some international lawyers, has been employed in the past to justify American air strikes against militants in Yemen, Somalia and the tribal areas of Pakistan. Mr Ban appeared to accept Ms Power’s case. Some of the more than 40 nations that have pledged arms or support to the fight against IS may still wish to see the issue go to the Security Council. But with Russia in an adversarial mood over Ukraine, an authorising resolution is a remote prospect.

The legality of eagles

Greater clarity on the legal position could help one so far absent ally: Britain. The prime minister, David Cameron, lost a House of Commons vote on attacking Syria last year and could not afford to lose another. But having received a formal request for assistance from Iraq, he has recalled Parliament and will seek approval for military action in Iraq, leaving Syria for another day; the French, already flying missions in Iraq, make a similar distinction.Turkey, another American ally not initially signed up to the attacks, seems already to have had a change of heart. On September 11th it refused to sign the “Jeddah communiqué”, in which various Arab nations promised to back America’s military action. Turkey’s president, Recep Tayyip Erdogan cited the safety of 46 Turks IS had taken hostage in Mosul, in Iraq. The captives were freed on September 20th amid rumours of a prisoner swap, or even worse; a new IS offensive against Syrian Kurds in their enclave of Kobane stoked Kurdish suspicions that the Turks had sold them out in some way. But on September 23rd Mr Erdogan declared that his country was ready to “give the necessary support to [the attacks on IS]. the support could be military or logistics.”America’s clearest success has been to gain strong backing from habitually shy Arab states. Saudi authorities even released photos of pilots ostensibly returning from missions in Syria; two of them were princes from the ruling al-Saud family, including a son of the heir to the throne. King Hussein of Jordan spoke bluntly of a struggle of good against evil.The effectiveness of the strikes against IS remains to be seen. A further set of attacks on targets in Syria on September 24th aimed at disrupting oil sales by IS, which may be earning the group as much as $2m a day. But the jihadists have had plenty of time to hide important assets in population centres. And there is a palpable shortage of forces on the ground to exploit the air offensive. This applies not just in Syria but also to an extent in Iraq. Most Iraqi Sunnis have yet to be convinced by recent attempts to shape a more inclusive, less sectarian government in Baghdad. And while IS may have been halted in its march on Baghdad, the jihadists are still capable of inflicting defeats on the Iraqi army, despite its overwhelming numerical superiority and American air power. On September 21st IS overran an Iraqi army base 50km (30 miles) west of Baghdad, capturing or killing hundreds of soldiers. Days later another base was surrounded

More than a prod

Elsewhere in the region a range of relatively moderate Islamist groups, including the Muslim Brotherhood, have joined with IS in seeing the coalition as the spearhead of a new Western crusade. In Syria, even secular opponents of Mr Assad’s rule warn of the danger of alienating opinion among the country’s majority Sunnis. In Jordan’s parliament MPs have engaged in shouting matches over the country’s participation in the war.

Iran, meanwhile, is playing a complex game. It supports both the government in Iraq, an American ally if hardly a trusted one, and the one in Syria, supposedly an American foe. The country’s leaders have publicly condemned America’s renewed intervention in the Middle East, but some diplomats have quietly hinted that they might be able to co-operate in the downfall of IS—which Iran loathes—in return for better terms in the continuing negotiations over their country’s nuclear programme. Similarly, Egypt’s president, Abdel Fattah al-Sisi, said his country would be a stronger member of the coalition if America sped up delivery of military hardware.On the morning after the first air strikes on Syria, a Pentagon commander, Lt General William Mayville, said the new campaign could last for years. It is far from clear that a fearful, terrorism-focused American public is ready for such a prolonged commitment. Mr Obama wants to use his country’s military power as a tool of geopolitical influence, which—by being withheld or used in the right way—can prod others in the region to assume their responsibilities and, as he said at the United Nations on September 24th, “explicitly, forcefully, and consistently” reject the ideologies of such organisations as al-Qaeda and IS. But such a clear message may not be easily heard above the din of civil war America has now joined itself to.

With the double bottom being seen in gold last year, most of the metals world believed in the birth of the new bull. And, many are still holding onto those hopes.But, as Ben Franklin once said, "he that lives on hope will die fasting." And, unfortunately, I believe that maintaining such hope will only lead to more pain in the coming months. Yet, for those willing and able to endure such pain, there should be a reprieve in 2015.But, what is amazing to me is the levels to which "investors" are willing to go in order to convince themselves that they are right about the metals market. Let's be honest, folks. If the metals go up, most people simply "know" that is what they are supposed to be doing. Most don't see this market as a two way market. That lack of understanding is abundantly clear from the comments I get on a weekly basis.In fact, the most common perspective I see is that if the metals are not going up, then they are simply being manipulated to go down. But, there is no one that exerts that much control on this market, even though some people believe there is in their hearts of hearts. Furthermore, the market moves based upon sentiment patterns so clearly most of the time, that it is very hard for me to believe that someone is controlling it to look like a natural sentiment pattern.But, at least from my perspective, it seems that those who scream and complain about manipulation the most are those that have been on the wrong side of this market for the last 3 years. Just ask yourself "if the market was going up, would you be considering it was manipulated?" This is where you test your intellectual honesty about this market.In fact, is there a single market on the face of this earth that does not go up and down? Corrections are a natural event within markets. But, for some reason, people in the metals world do not seem to believe in the fact that the metals can correct.The fact is that markets move in two directions. And when someone is caught on the wrong side of a market, it is difficult for their ego to accept they are wrong, especially if they are an analyst with a following. And, we see this most in the metals world. So, if the market is going down rather than the direction that everyone "knows it should be going," then claiming it is being manipulated is much easier than admitting that fundamentals led us astray, or that they were simply wrong. Claiming that it is being manipulated is the easy way out, and the manner in which many can save face, while holding losing positions that they "know is right."I have said this before and it still amazes me. But, this is the only market I have ever seen wherein an investor can take a 65% loss in their position (those holding silver since the market highs), and yet staunchly claim they are still 100% correct.Now, I can understand the perspective of those that buy metals and simply hold it as insurance against financial collapse. For them, the metals are not viewed as an investment, but rather as insurance. And, I believe that everyone should have some amount of physical metals in their portfolio for this reason alone. But, please do recognize that owning it for insurance purposes is very different than owning it for investment purposes.However, those that own it for insurance purposes are not the ones of whom I speak. Rather, the ones who have been buying for investment purposes seem to turn into the "insurance buyer" when the market goes down, and then claim the market is being manipulated. When the metals are strong, they are screaming it is the best investment in the world. However, when metals go down, they claim it is manipulated to do so, and that the reason one should be owning it now is for insurance purposes. So, are they to be owned for investment purposes, or for insurance purposes? Are they not being manipulated when they go up, and only being manipulated when they go down? In my humble opinion, these folks lack any form of intellectual honestly, and should be summarily ignored.I believe it is akin to a bully, who acts as such when metals are at their highs, and then when faced with someone who scares him (an "unexpected" market decline), runs behind mommy's skirt (the insurance buyer) and yells "manipulation."Ultimately, one has to be honest with themselves if they want to make money in this market, assuming you are an investor and not an insurance buyer. So, if you own metals for insurance purposes, then you are happy to be able to buy more insurance at a cheaper price. If you are an investor, learn to accept that markets move up, as well as down, and attempt to find a methodology which can warn you of potential down turns so you can at least hedge your position against 65% losses. I am sorry, but no one should have to endure a 65% turn down in the value of an investment without protecting themselves properly.As for the near term expectations in GLD, while I could be wrong, the lack of strong downside follow through early this past week tells me that any break down in GLD below 2013 may be delayed until the 1st or 2nd week of October. Based upon the patterns that I am watching, the immediate set up to take us below the 2013 lows this past week did not trigger, which tells me that I believe we will now hold the 115-115.50 region as support, and see a nice bounce in the GLD in the upcoming week or two.My main resistance region for this bounce is the 119.50-121 region. From this region, I will re-evaluate the market to determine if this is the optimal point to short for a drop to the 105 region, or if the market has designs on targeting, or even breaking over 123 first. A strong break out over 123 will again have me considering the 130-133 region target. But, for now, it has become quite dangerous to short the GLD, as long as we remain about 114.50.Now, from a broader perspective, many of you have been asking me to "ring the bell" when it is time to start buying heavily into gold. Well, that time will likely begin in mid-October, assuming we do not see a break out before then. The patterns I am watching are at a very important inflection point. Based upon the greater likelihood at this time - while I am seeing a bounce higher coming in the metals - it seems that this bounce would likely be a shorting opportunity for VERY aggressive traders who know how to use stops appropriately.I can tell you that those who followed me over the last few months have done very well shorting the metals, despite everyone telling us it was a fools trade from which we would be stopped out quite quickly. However, we have now cashed in a great majority of those shorts for nice profits, and are willing to risk some of those profits for another attempt at a short over the next few weeks in the resistance region cited, based upon how the market moves up into that region. If we see early indications that the region will not hold as resistance, we will clearly not short the market and may even attempt a long trade. But, as I say, that will be a game time decision.Now, assuming that the resistance region will hold, I am expecting a strong drop into the middle of October that will likely take out the 2013 lows in gold, which confirms that we are on our way to completing this 3+ year correction in 2014. My ideal target for that break down will be the 105 region in the GLD, with the potential to extend beyond that depending on how emotional the longs become when support is taken out. But, the minimum region I would expect to be struck is the 105 region. And, depending upon what the pattern looks like at that time, it may be the signal that you must engage in long term buying. Yes, I am now signaling that I think you should begin your buying around the mid to late October time frame, assuming we get the break down I am expecting in a few weeks.Assuming we see that break down, that low in October is only likely to be the first of two lows I am expecting before the market completes this 3+ year correction. I would expect to see a bounce back towards the 114 region from that low, which I would expect to hold as resistance, and then send us back down to make the final lower low in this long term correction. That, my friends, should be the buying opportunity you will not see again for many years to come.Alternatively, we have to respect any market that is within a larger degree corrective pattern. They can take many twists and turns, which seem "unexpected" to most. However, we need to be prepared for those twists and turns, and be able to recognize when they are about to trigger. So, as I said before, the market is at a very important juncture. It can chose to complete this long term correction with a corrective bounce into the next week or two, which will set up the final lows in 2014. However, should the market break out over resistance, rather than setting up for the lower lows we will see before this long term correction is over, then we will likely see a rally back to the 130-133 region, which will only then set up the run down to the final lows into 2015.In summary, we have a very important inflection point before us over the next two weeks which will determine if this correction ends in 2014, or 2015.

Barely a year removed from the devastation of the 2008 financial crisis, the president of the Federal Reserve Bank of New York faced a crossroads. Congress had set its sights on reform.

The biggest banks in the nation had shown that their failure could threaten the entire financial system. Lawmakers wanted new safeguards.

The Federal Reserve, and, by dint of its location off Wall Street, the New York Fed, was the logical choice to head the effort. Except it had failed miserably in catching the meltdown.New York Fed President William Dudley had to answer two questions quickly: Why had his institution blown it, and how could it do better? So he called in an outsider, a Columbia University finance professor named David Beim, and granted him unlimited access to investigate. In exchange, the results would remain secret.After interviews with dozens of New York Fed employees, Beim learned something that surprised even him. The most daunting obstacle the New York Fed faced in overseeing the nation's biggest financial institutions was its own culture. The New York Fed had become too risk-averse and deferential to the banks it supervised. Its examiners feared contradicting bosses, who too often forced their findings into an institutional consensus that watered down much of what they did.The report didn't only highlight problems. Beim provided a path forward. He urged the New York Fed to hire expert examiners who were unafraid to speak up and then encourage them to do so. It was essential, he said, to preventing the next crisis.A year later, Congress gave the Federal Reserve even more oversight authority. And the New York Fed started hiring specialized examiners to station inside the too-big-to fail institutions, those that posed the most risk to the financial system.One of the expert examiners it chose was Carmen Segarra.Segarra appeared to be exactly what Beim ordered. Passionate and direct, schooled in the Ivy League and at the Sorbonne, she was a lawyer with more than 13 years of experience in compliance – the specialty of helping banks satisfy rules and regulations. The New York Fed placed her inside one of the biggest and, at the time, most controversial banks in the country, Goldman Sachs.

It did not go well. She was fired after only seven months.As ProPublica reported last year, Segarra sued the New York Fed and her bosses, claiming she was retaliated against for refusing to back down from a negative finding about Goldman Sachs. A judge threw out the case this year without ruling on the merits, saying the facts didn't fit the statute under which she sued.At the bottom of a document filed in the case, however, her lawyer disclosed a stunning fact: Segarra had made a series of audio recordings while at the New York Fed. Worried about what she was witnessing, Segarra wanted a record in case events were disputed. So she had purchased a tiny recorder at the Spy Store and began capturing what took place at Goldman and with her bosses.Segarra ultimately recorded about 46 hours of meetings and conversations with her colleagues. Many of these events document key moments leading to her firing. But against the backdrop of the Beim report, they also offer an intimate study of the New York Fed's culture at a pivotal moment in its effort to become a more forceful financial supervisor. Fed deliberations, confidential by regulation, rarely become public.The recordings make clear that some of the cultural obstacles Beim outlined in his report persisted almost three years after he handed his report to Dudley. They portray a New York Fed that is at times reluctant to push hard against Goldman and struggling to define its authority while integrating Segarra and a new corps of expert examiners into a reorganized supervisory scheme.Segarra became a polarizing personality inside the New York Fed — and a problem for her bosses — in part because she was too outspoken and direct about the issues she saw at both Goldman and the Fed. Some colleagues found her abrasive and complained. Her unwillingness to conform set her on a collision course with higher-ups at the New York Fed and, ultimately, led to her undoing.In a tense, 40-minute meeting recorded the week before she was fired, Segarra's boss repeatedly tries to persuade her to change her conclusion that Goldman was missing a policy to handle conflicts of interest. Segarra offered to review her evidence with higher-ups and told her boss she would accept being overruled once her findings were submitted. It wasn't enough."Why do you have to say there's no policy?" her boss said near the end of the grueling session."Professionally," Segarra responded, "I cannot agree."The New York Fed disputes Segarra's claim that she was fired in retaliation."The decision to terminate Ms. Segarra's employment with the New York Fed was based entirely on performance grounds, not because she raised concerns as a member of any examination team about any institution," it said in a two-page statement responding to an extensive list of questions from ProPublica and This American Life.The statement also defends the bank's record as regulator, saying it has taken steps to incorporate Beim's recommendations and "provides multiple venues and layers of recourse to help ensure that its employees freely express their views and concerns.""The New York Fed," the statement says, "categorically rejects the allegations being made about the integrity of its supervision of financial institutions."In the spring of 2009, New York Fed President William Dudley put together a team of eight senior staffers to help Beim in his inquiry. In many ways, this was familiar territory for Beim.He had worked on Wall Street as a banker in the 1980s at Bankers Trust Company, assisting the firm through its transition from a retail to an investment bank. In 1997, the New York Fed hired Beim to study how it might improve its examination process. Beim recommended the Fed spend more time understanding the businesses it supervised. He also suggested a system of continuous monitoring rather than a single year-end examination.Beim says his team in 2009 pursued a no-holds-barred investigation of the New York Fed. They were emboldened because the report was to remain an internal document, so there was no reason to hold back for fear of exposure. The words "Confidential Treatment Requested" ran across the bottom of the report."Nothing was off limits," says Beim. "I was told I could ask anyone any question. There were no restrictions."In the end, his 27-page report laid bare a culture ruled by groupthink, where managers used consensus decision-making and layers of vetting to water down findings. Examiners feared to speak up lest they make a mistake or contradict higher-ups. Excessive secrecy stymied action and empowered gatekeepers, who used their authority to protect the banks they supervised."Our review of lessons learned from the crisis reveals a culture that is too risk-averse to respond quickly and flexibly to new challenges," the report stated. "A number of people believe that supervisors paid excessive deference to banks, and as a result they were less aggressive in finding issues or in following up on them in a forceful way."One New York Fed employee, a supervisor, described his experience in terms of "regulatory capture," the phrase commonly used to describe a situation where banks co-opt regulators. Beim included the remark in a footnote. "Within three weeks on the job, I saw the capture set in," the manager stated. Confronted with the quotation, senior officers at the Fed asked the professor to remove it from the report, according to Beim. "They didn't give an argument," Beim said in an interview. "They were embarrassed." He refused to change it.

The entrance to the Federal Reserve Bank of New York. (Andrew Burton/Getty Images)

The Beim report made the case that the New York Fed needed a specific kind of culture to transform itself into an institution able to monitor complex financial firms and catch the kinds of risks that were capable of torpedoing the global economy.That meant hiring "out-of-the-box thinkers," even at the risk of getting "disruptive personalities," the report said. It called for expert examiners who would be contrarian, ask difficult questions and challenge the prevailing orthodoxy. Managers should add categories like "willingness to speak up" and "willingness to contradict me" to annual employee evaluations. And senior Fed managers had to take the lead."The top has to articulate why we're going through this change, what the benefits are going to be and why it's so important that we're going to monitor everyone and make sure they stay on board," Beim said in an interview.Beim handed the report to Dudley. The professor kept it in draft form to help maintain secrecy and because he thought the Fed president might request changes. Instead, Dudley thanked him and that was it. Beim never heard from him again about the matter, he said.In 2011, the Financial Crisis Inquiry Commission, created by Congress to investigate the causes behind the economic calamity, publicly released hundreds of documents. Buried among them was Beim's report.Because of the report's candor, the release surprised Beim and New York Fed officials. Yet virtually no one else noticed.

Among the New York Fed employees enlisted to help Beim in his investigation was Michael Silva.As a Fed veteran, Silva was a logical choice. A lawyer and graduate of the United States Naval Academy, he joined the bank as a law clerk in 1992. Silva had also assisted disabled veterans and had gone into Iraq after the 2003 invasion to help the country's central bank. Prior to working on Beim's report, he had been chief of staff to the previous New York Fed president, Timothy Geithner.In declining through his lawyer to comment for this story, Silva cited the appeal of Segarra's lawsuit and a prohibition on disclosing unpublished supervisory material. The rule allows regulators to monitor banks without having to worry about the release of information that could alarm customers and create a run on a bank that's under scrutiny.Silva had been in the room with Geithner in September 2008 during a seminal moment of the financial crisis. Shares in a large money market fund – the Reserve Primary Fund – had fallen below the standard price of $1, "breaking the buck" and threatening to touch off a run by investors. The investment firm Lehman Brothers had entered bankruptcy, and the financial system appeared in danger of collapse.In Segarra's recordings, Silva tells his team how, at least initially, no one in the war room at the New York Fed knew how to respond. He went into the bathroom, sick to his stomach, and vomited."I never want to get close to that moment again, but maybe I'm too close to that moment," Silva told his New York Fed team at Goldman Sachs in a meeting one day.Despite his years at the New York Fed, Silva was new to the institution's supervisory side. He had never been an examiner or participated as part of a team inside a regulated bank until being appointed to lead the team at Goldman Sachs. Silva prefaced his financial crisis anecdote by saying the team needed to understand his motivations, "so you can perhaps push back on these things."In the recordings, Silva then offered a second anecdote. This one involved the moments before the Lehman bankruptcy.Silva related how the top bankers in the nation were asked to contribute money to save Lehman. He described his disappointment when Goldman executives initially balked. Silva acknowledged that it might have been a hard sell to shareholders, but added that "if Goldman had stepped up with a big number, that would have encouraged the others.""It was extraordinarily disappointing to me that they weren't thinking as Americans," Silva says in the recording. "Those two things are very powerful experiences that, I will admit, influence my thinking."

Silva's stories help explain his approach to a controversial deal that came to the New York Fed team's attention in January 2012, two months after Segarra arrived. She said the Fed's handling of the deal demonstrated its timidity whenever questions arose about Goldman's actions. Debate about the deal runs through many of Segarra's recordings.On Friday, Jan. 6, 2012, at 3:54 p.m., a senior Goldman official sent an email to the on-site Fed regulators – including Silva, Segarra and Segarra's legal and compliance manager, Johnathon Kim. Goldman wanted to notify them about a fast-moving transaction with a large Spanish bank, Banco Santander. Spanish regulators had signed off on the deal, but Goldman was reaching out to its own regulators to see whether they had any questions.At the time, European banks were shaky, particularly the Spanish ones. To shore up confidence, the European Banking Authority was demanding that banks hold more capital to offset potential future losses. Meeting these capital requirements was at the heart of the Goldman-Santander transaction.Under the deal, Santander transferred some of the shares it held in its Brazilian subsidiary to Goldman. This effectively reduced the amount of capital Santander needed. In exchange for a fee from Santander, Goldman would hold on to the shares for a few years and then return them. The deal would help Santander announce that it had reached its proper capital ratio six months ahead of the deadline.In the recordings, one New York Fed employee compared it to Goldman "getting paid to watch a briefcase." Silva states that the fee was $40 million and that potentially hundreds of millions more could be made from trading on the large number of shares Goldman would hold.Santander and Goldman declined to respond to detailed questions about the deal.Silva did not like the transaction. He acknowledged it appeared to be "perfectly legal" but thought it was bad to help Santander appear healthier than it might actually be."It's pretty apparent when you think this thing through that it's basically window dressing that's designed to help Banco Santander artificially enhance its capital position," he told his team before a big meeting on the topic with Goldman executives.The deal closed the Sunday after the Friday email. The following week, Silva spoke with top Goldman people about it and told his team he had asked why the bank "should" do the deal. As Silva described it, there was a divide between the Fed's view of the deal and Goldman's."[Goldman executives] responded with a bunch of explanations that all relate to, 'We can do this,' " Silva told his team.Privately, Segarra saw little sense in Silva's preoccupation with the question of whether "should" applied to the Santander deal. In an interview, she said it seemed to her that Silva and the other examiners who worked under him tended to focus on abstract issues that were "fuzzy" and "esoteric" like "should" and "reputational risk."Segarra believed that Goldman had more pressing compliance issues – such as whether executives had checked the backgrounds of the parties to the deal in the way required by anti-money laundering regulations.

Segarra had joined the New York Fed on Oct. 31, 2011, as it was gearing up for its new era overseeing the biggest and riskiest banks. She was part of a reorganization meant to put more expert examiners to the task. In the past, examiners known as "relationship managers" had been stationed inside the banks. When they needed an in-depth review in a particular area, they would often call a risk specialist from that area to come do the examination for them.In the new system, relationship managers would be redubbed "business-line specialists." They would spend more time trying to understand how the banks made money. The business-line specialists would report to the senior New York Fed person stationed inside the bank.The risk specialists like Segarra would no longer be called in from outside. They, too, would be embedded inside the banks, with an open mandate to do continuous examinations in their particular area of expertise, everything from credit risk to Segarra's specialty of legal and compliance. They would have their own risk-specialist bosses but would also be expected to answer to the person in charge at the bank, the same manager of the business-line specialists.In Goldman's case, that was Silva.Shortly after the Santander transaction closed, Segarra notified her own risk-specialist bosses that Silva was concerned. They told her to look into the deal. She met with Silva to tell him the news, but he had some of his own. The general counsel of the New York Fed had "reined me in," he told Segarra. Silva did not refer by name to Tom Baxter, the New York Fed's general counsel, but said: "I was all fired up, and he doesn't want me getting the Fed to assert powers it doesn't have."This conversation occurred the day before the New York Fed team met with Goldman officials to learn about the inner workings of the deal.From the recordings, it's not spelled out exactly what troubled the general counsel. But they make clear that higher-ups felt they had no authority to nix the Santander deal simply because Fed officials didn't think Goldman "should" do it.Segarra told Silva she understood but felt that if they looked, they'd likely find holes. Silva repeated himself. "Well, yes, but it is actually also the case that the general counsel reined me in a bit on that," he reminded Segarra.The following day, the New York Fed team gathered before their meeting with Goldman. Silva outlined his concerns without mentioning the general counsel's admonishment. He said he thought the deal was "legal but shady.""I'd like these guys to come away from this meeting confused as to what we think about it," he told the team. "I want to keep them nervous."As requested, Segarra had dug further into the transaction and found something unusual: a clause that seemed to require Goldman to alert the New York Fed about the terms and receive a "no objection."This appeared to pique Silva's interest. "The one thing I know as a lawyer that they never got from me was a no objection," he said at the pre-meeting. He rallied his team to look into all aspects of the deal. If they would "poke with our usual poker faces," Silva said, maybe they would "find something even shadier."But what loomed as a showdown ended up fizzling. In the meeting with Goldman, an executive said the "no objection" clause was for the firm's benefit and not meant to obligate Goldman to get approval. Rather than press the point, regulators moved on.Afterward, the New York Fed staffers huddled again on their floor at the bank. The fact-finding process had only just started. In the meeting, Goldman had promised to get back to the regulators with more information to answer some of their questions. Still, one of the Fed lawyers present at the post-meeting lauded Goldman's "thoroughness."Another examiner said he worried that the team was pushing Goldman too hard."I think we don't want to discourage Goldman from disclosing these types of things in the future," he said. Instead, he suggested telling the bank, "Don't mistake our inquisitiveness, and our desire to understand more about the marketplace in general, as a criticism of you as a firm necessarily."

To Segarra, the "inquisitiveness" comment represented a fear of upsetting Goldman.By law, the banks are required to provide information if the New York Fed asks for it. Moreover, Goldman itself had brought the Santander deal to the regulators' attention.Beim's report identified deference as a serious problem. In an interview, he explained that some of this behavior could be chalked up to a natural tendency to want to maintain good relations with people you see every day. The danger, Beim noted, is that it can morph into regulatory capture. To prevent it, the New York Fed typically tries to move examiners every few years.Over the ensuing months, the Fed team at Goldman debated how to demonstrate their displeasure with Goldman over the Santander deal. The option with the most interest was to send a letter saying the Fed had concerns, but without forcing Goldman to do anything about them.The only downside, said one Fed official on a recording in late January 2012, was that Goldman would just ignore them."We're not obligating them to do anything necessarily, but it could very effectively get a reaction and change some behavior for future transactions," one team member said.In the same recorded meeting, Segarra pointed out that Goldman might not have done the anti-money laundering checks that Fed guidance outlines for deals like these. If so, the team might be able to do more than just send a letter, she said. The group ignored her.It's not clear from the recordings if the letter was ever sent.Silva took an optimistic view in the meeting. The Fed's interest got the bank's attention, he said, and senior Goldman executives had apologized to him for the way the Fed had learned about the deal. "I guarantee they'll think twice about the next one, because by putting them through their paces, and having that large Fed crowd come in, you know we, I fussed at 'em pretty good," he said. "They were very, very nervous."Segarra had worked previously at Citigroup, MBNA and Société Générale. She was accustomed to meetings that ended with specific action items.At the Fed, simply having a meeting was often seen as akin to action, she said in an interview. "It's like the information is discussed, and then it just ends up in like a vacuum, floating on air, not acted upon."Beim said he found the same dynamic at work in the lead up to the financial crisis. Fed officials noticed the accumulating risk in the system. "There were lengthy presentations on subjects like that," Beim said. "It's just that none of those meetings ever ended with anyone saying, 'And therefore let's take the following steps right now.'"

The New York Fed's post-crisis reorganization didn't resolve longstanding tensions between its examiner corps. In fact, by empowering risk specialists, it may have exacerbated them.Beim had highlighted conflicts between the two examiner groups in his report. "Risk teams ... often feel that the Relationship teams become gatekeepers at their banks, seeking to control access to their institutions," he wrote. Other examiners complained in the report that relationship managers "were too deferential to bank management."In the new order, risk specialists were now responsible for their own examinations. No longer would the business-line specialists control the process. What Segarra discovered, however, was that the roles had not been clearly defined, allowing the tensions Beim had detailed to fester.Segarra said she began to experience pushback from the business-line specialists within a month of starting her job. Some of these incidents are detailed in her lawsuit, recorded in notes she took at the time and corroborated by another examiner who was present.Business-line specialists questioned her meeting minutes; one challenged whether she had accurately heard comments by a Goldman executive at a meeting. It created problems, Segarra said, when she drew on her experiences at other banks to contradict rosy assessments the business-line specialists had of Goldman's compliance programs. In the recordings, she is forceful in expressing her opinions.ProPublica and This American Life reached out to four of the business-line specialists who were on the Goldman team while Segarra was there to try and get their side of the story. Only one responded, and that person declined a request for comment. In the recordings, it's clear from her interactions with managers that Segarra found the situation upsetting, and she did not hide her displeasure. She repeatedly complains about the business-line specialists to Kim, her legal and compliance manager, and other supervisors."It's like even when I try to explain to them what my evidence is, they won't even listen," she told Kim in a recording from Jan. 6, 2012. "I think that management needs to do a better job of managing those people."Kim let her know in the meeting that he did not expect such help from the Fed's top management. "I just want to manage your expectations for our purposes," he told Segarra. "Let's pretend that it's not going to happen."Instead, Kim advised Segarra "to be patient" and "bite her tongue." The New York Fed was trying to change, he counseled, but it was "this giant Titanic, slow to move."Three days later, Segarra met with her fellow legal and compliance risk specialists stationed at the other banks. In the recording, the meeting turns into a gripe session about the business-line specialists. Other risk specialists were jockeying over control of examinations, too, it turned out."It has been a struggle for me as to who really has the final say about recommendations," said one."If we can't feel that we'll have management support or that our expertise per se is not valued, it causes a low morale to us," said another.

On Feb. 21, 2012, Segarra met with her manager, Kim, for their weekly meeting. After covering some process issues with her examinations, the recordings show, they again discussed the tensions between the two camps of specialists.Kim shifted some of the blame for those tensions onto Segarra, and specifically onto her personality: "There are opinions that are coming in," he began.First he complimented her: "I think you do a good job of looking at issues and identifying what the gaps are and you know determining what you want to do as the next steps. And I think you do a lot of hard work, so I'm thankful," Kim said. But there had been complaints.She was too "transactional," Kim said, and needed to be more "relational."

A colleague who worked with Segarra at the New York Fed said Segarra often asked direct — sometimes embarrassingly direct — questions, but they were all questions that needed to be asked. (Adam Lerner/AP Images for ProPublica)

"I'm never questioning about the knowledge base or assessments or those things; it's really about how you are perceived," Kim said. People thought she had "sharper elbows, or you're sort of breaking eggs. And obviously I don't know what the right word is."Segarra asked for specifics. Kim demurred, describing it as "general feedback."In the conversation that followed, Kim offered Segarra pointed advice about behaviors that would make her a better examiner at the New York Fed. But his suggestions, delivered in a well-meaning tone, tracked with the very cultural handicaps that Beim said needed to change.Kim: "I would ask you to think about a little bit more, in terms of, first of all, the choice of words and not being so conclusory."Beim report: "Because so many seem to fear contradicting their bosses, senior managers must now repeatedly tell subordinates they have a duty to speak up even if that contradicts their bosses."Kim: "You use the word 'definitely' a lot, too. If you use that, then you want to have a consensus view of definitely, not only your own."Beim report: "An allied issue is that building consensus can result in a whittling down of issues or a smoothing of exam findings. Compromise often results in less forceful language and demands on the banks involved."In Segarra's recordings, there is some evidence to back Kim's critique. Sometimes she cuts people off, including her bosses. And she could be brusque or blunt.A colleague who worked with Segarra at the New York Fed, who does not have permission from their employer to be identified, told ProPublica that Segarra often asked direct questions. Sometimes they were embarrassingly direct, this former examiner said, but they were all questions that needed to be asked. This person characterized Segarra's behavior at the New York Fed as "a breath of fresh air."ProPublica also reached out to three people who worked with Segarra at two other firms. All three praised her attitude at work and said she never acted unprofessionally.In the meeting with Kim, Segarra observed that the skills that made her successful in the private sector did not seem to be the ones that necessarily worked at the New York Fed.Kim said that she needed to make changes quickly in order to succeed."You mean, not fired?" Segarra said."I don't want to even get there," Kim responded.It would be unfair to fire her, Segarra offered, since she was doing a good job."I'm here to change the definition of what a good job is," Kim said. "There are two parts to it: Actually producing the results, which I think you're very capable of producing the results. But also be mindful of enfolding people and defusing situations, making sure that people feel like they're heard and respected."Segarra had thought her job was simple: Follow the evidence wherever it led. Now she was being told she had to "enfold" business-line specialists and "defuse" their objections."What does this have to do with bank examinations," Segarra wondered to herself, "or Goldman Sachs?"

Segarra worked on her examination of Goldman's conflict-of-interest policies for nearly seven months. Her mandate was to determine whether Goldman had a comprehensive, firm-wide conflicts-of-interest policy as of Nov. 1, 2011.Segarra has records showing that there were at least 15 meetings on the topic. Silva or Kim attended the majority. At an impromptu gathering of regulators after one such meeting early that December, her contemporaneous notes indicate Silva was distressed by how Goldman was dealing with conflicts of interest.By the spring of 2012, Segarra believed her bosses agreed with her conclusion that Goldman did not have a policy sufficient to meet Fed guidance.During her examination, she regularly talked about her findings with fellow legal and compliance risk specialists from other banks. In April, they all came together for a vetting session to report conclusions about their respective institutions. After a brief presentation by Segarra, the team agreed that Goldman's conflict-of-interest policies didn't measure up, according to Segarra and one other examiner who was present.In May, members of the New York Fed team at Goldman met to discuss plans for their annual assessment of the bank. Segarra was sick and not present. Silva recounts in an email that he was considering informing Goldman that it did not have a policy when a business-line specialist interjected and said Goldman did have a conflict-of-interest policy – right on the bank's website.In a follow-up email to Segarra, Silva wrote: "In light of your repeated and adamant assertions that Goldman has no written conflicts of interest policy, you can understand why I was surprised to find a "Conflicts of Interests Section" in Goldman's Code of Conduct that seemed to me to define, prohibit and instruct employees what to do about it."But in Segarra's view, the code fell far short of the Fed's official guidance, which calls for a policy that encompasses the entire bank and provides a framework for "assessing, controlling, measuring, monitoring and reporting" conflicts.ProPublica sent a copy of Goldman's Code of Conduct to two legal and compliance experts familiar with the Fed's guidance on the topic. Both did not want be quoted by name, either because they were not authorized by their employer or because they did not want to publicly criticize Goldman Sachs. Both have experience as bank examiners in the area of legal and compliance. Each said Goldman's Code of Conduct would not qualify as a firm-wide conflicts of interest policy as set out by the Fed's guidance.In the recordings, Segarra asks Gwen Libstag, the executive at Goldman who is responsible for managing conflicts, whether the bank has "a definition of a conflict of interest, what that is and what that means?""No," Libstag replied at the meeting in April.Back in December, according to meeting minutes, a Goldman executive told Segarra and other regulators that Goldman did not have a single policy: "It's probably more than one document – there is no one policy per se."Early in her examination, Segarra had asked for all the conflict-of-interest policies for each of Goldman's divisions as of Nov. 1, 2011. It took months and two requests, Segarra said, to get the documents. They arrived in March. According to the documents, two of the divisions state that the first policy dates to December 2011. The documents also indicate that policies for another division were incomplete.ProPublica and This American Life sent Goldman Sachs detailed questions about the bank's conflict-of-interest policies, Segarra and events in the meetings she recorded.In a three-paragraph response, the bank said, "Goldman Sachs has long had a comprehensive approach for addressing potential conflicts." It also cited Silva's email about the Code of Conduct in the statement, saying: "To get a balanced view of her claims, you should read what her supervisor wrote after discovering that what she had said about Goldman was just plain wrong."Goldman's statement also said Segarra had unsuccessfully interviewed for jobs at Goldman three times. Segarra said that she recalls interviewing with the bank four times, but that it shouldn't be surprising. She has applied for jobs at most of the top banks on Wall Street multiple times over the course of her career, she said.

The audio is muddy but the words are distinct. So is the tension. Segarra is in Silva's small office at Goldman Sachs with his deputy. The two are trying to persuade her to change her view about Goldman's conflicts policy."You have to come off the view that Goldman doesn't have any kind of conflict-of- interest policy," are the first words Silva says to her. Fed officials didn't believe her conclusion — that Goldman lacked a policy — was "credible."Segarra tells him she has been writing bank compliance policies for a living since she graduated from law school in 1998. She has asked Goldman for the bank's policies, and what they provided did not comply with Fed guidance."I'm going to lose this entire case," Silva says, "because of your fixation on whether they do or don't have a policy. Why can't we just say they have basic pieces of a policy but they have to dramatically improve it?"It's not like Goldman doesn't know what an adequate policy contains, she says. They have proper policies in other areas."But can't we say they have a policy?" Silva says, a question he asks repeatedly in various forms during the meeting.

Audio Highlights from Inside the New York Fed

Listen to excerpts from the recordings Carmen Segarra captured at the Federal Reserve Bank of New York.

Segarra offers to meet with anyone to go over the evidence collected from dozens of meetings and hundreds of documents. She says it's OK if higher-ups want to change her conclusions after she submits them.But Silva says the lawyers at the Fed have determined Goldman has a policy. As a comparison, he brings up the Santander deal. He had thought the deal was improper, but the general counsel reined him in."I lost the Santander transaction in large part because I insisted that it was fraudulent, which they insisted is patently absurd," Silva said, "and as a result of that, I didn't get taken seriously."Now, the same thing was happening with conflicts, he said.A week later, Silva called Segarra into a conference room and fired her. The New York Fed, he told Segarra, who was recording the conversation, had "lost confidence in [her] ability to not substitute [her] own judgment for everyone else's."Producer Brian Reed of This American Life contributed reporting to this story. ProPublica intern Abbie Nehring contributed research.

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.